Oireachtas Joint and Select Committees

Thursday, 13 February 2014

Public Accounts Committee

 

Mr. Seamus McCarthy:

The National Treasury Management Agency was established in 1990 to manage borrowing on behalf of the State. Since then, it has evolved into a complex organisation with multiple functions and roles. We have tried to provide an overview of those many roles and functions in Chapter 28.

The sets of financial statements produced by the agency reflect the complex structure that exists and the funds it manages. The various financial statements are explained in paragraphs 28.5 to 28.7. The committee may wish to note that, with the agreement of the Minister for Finance, five small accounts which were accounted for separately in prior years have been incorporated into the 2012 national debt accounts, for efficiency reasons. The level of information presented is not affected. Legislation is planned to revise the structure and governance of the agency and its constituent bodies. Those proposals will, in due course, require further restructuring of the financial statements and accounts.

The NTMA’s primary function remains the management of borrowing on behalf of the State. The results of that borrowing activity are reported in the agency’s national debt account, which is also reproduced by the Department of Finance as part of the annual finance accounts. General Government debt is the standard measure used to report Government debt under Maastricht treaty provisions. At the end of 2012, general Government debt stood at around €192 billion, an increase of €23 billion or 14% year on year. The end of 2012 debt represented 117% of gross domestic product, compared with 104% a year earlier.

The principal components of general Government debt at the end of 2012 were borrowing by the agency on behalf of the State, referred to as gross national debt and which is accounted for in the national debt account, and promissory notes issued in 2010 by the Minister for Finance to the Irish Bank Resolution Corporation and the EBS, which were not included in the agency’s national debt accounting. The nominal value of the promissory notes at the end of 2012 was just over €25 billion. As part of the liquidation of the Irish Bank Resolution Corporation in February 2013, the related promissory notes were cancelled. These were replaced with floating rate Government bonds issued by the agency, which now form part of the gross national debt. The nominal value of the outstanding EBS promissory notes was €214 million at the end of June 2013. At that date, almost 90% of the gross national debt was in the form of medium to long-term debt. Figure 2.6 presents a maturity profile of the debt and indicates that more than €100 billion falls due for repayment by 2020. Funding received under the EU-IMF programme of financial support for Ireland accounted for almost one third of gross national debt.

Between September 2010 and July 2012, the NTMA did not actively seek funding in the bond markets because the cost of borrowing would have been too high. Since mid-2011, there has been a sharp fall in the cost of Government borrowing, as indicated in figure 2.4. This allowed the agency to re-enter the market. The Accounting Officer will be able to update the committee on the current position in that regard. Part of the NTMA’s funding strategy since the beginning of the financial crisis has been the maintenance of high levels of Exchequer cash balances. At the end of June 2013, the total of cash balances and other financial assets stood at more than €30 billion.

The National Pensions Reserve Fund was established in April 2001 with a statutory objective to meet as much as possible of the costs of social welfare and public service pensions from 2025 until at least 2055. The fund is controlled by the National Pensions Reserve Fund Commission. The Minister for Finance decided in 2009 to use part of the assets of the fund to assist in dealing with the financial crisis. As provided for in law, he directed the commission to make substantial investments in AIB and Bank of Ireland. The financial statements of the fund for the year ended 31 December 2012 indicate that at that date the fund had assets of €14.6 billion. This comprised directed investments valued at €8.6 billion and the residual discretionary portfolio valued at just over €6 billion. As set out in note 16 of the fund accounts, the planned NTMA legislation will result in changes to the fund, including establishment of the Ireland strategic investment fund and the dissolution of the commission.

In my 2011 report on the accounts of the public services, I reported on excess non-contractual charges levied on the fund by State Street Bank Europe Limited, which provided transition management services for the sale of €4.7 billion of fund assets in early 2011. Following the discovery of the overcharging, the fund received reimbursements totalling €3.2 million and the matter was investigated by the UK’s Financial Conduct Authority. As the committee is probably aware, the authority published its final notice in relation to the investigation on 30 January 2014. The authority imposed a fine on State Street Bank Europe of almost £23 million sterling for breaches of the authority’s principles for financial service businesses. The Accounting Officer will be able to update the committee in this regard.

Another key function of the National Treasury Management Agency is the management of compensation claims against certain State bodies in personal injury, property damage and clinical negligence claims. When performing these functions, the agency is known as the State Claims Agency. Chapter 29 examines the agency’s management of the clinical indemnity scheme, which accounts for the highest value claims. The scheme was established in 2002. It covers all medical malpractice and clinical negligence claims arising from the diagnosis, treatment and care of patients taken against public health care enterprises and their clinical, nursing and allied health care practitioners. The scheme is funded on a pay-as-you-go basis from a subhead in the Health Service Executive Vote. In 2012, the total payout by the agency in respect of settled claims was in excess of €60 million. An amount of €45 million was received by the Exchequer in December 2012 from a UK-based medical defence organisation, the Medical Defence Union. The amount represented a negotiated settlement reached in respect of the union’s remaining liabilities in Ireland dating from before 1 February 2004, when clinical indemnity scheme cover was extended to the union’s members.

At the end of 2012, the agency had about 2,600 clinical claims on hand with a potential liability estimated at €970 million. The estimate is based on the most likely outcome in respect of the amount of awards or settlements and all associated costs, plus a margin of comfort of up to 20%. The estimate is used to prepare annual budget forecasts and is disclosed in the annual financial statements of the agency and the HSE. The agency views the 20% comfort margin as an acknowledged, conventional provision used by prudential insurers and indemnity providers. However, as the scheme is a State-funded pay-as-you-go scheme, the examination concluded that the inclusion of the 20% margin may result in overstatement of the potential liability in respect of active claims. We recommended that the estimates of potential liability for cases on hand should be based on statistical probabilities and informed by analysis of the outcomes of previous cases.

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